A few weeks ago, the president signed the ABLE Act. But now he is proposing a change in tax law that could effectively kill it.
Like other 529 plans, ABLE account contributions are made after-tax. The money grows tax-free. Provided the contributions and earnings are used for qualified disability expenses, withdrawals are tax-free. They very much resemble Roth IRAs, except the savings intention here is disability costs and not retirement.
The Administration’s plan calls for all earnings distributions on 529 plans to be subject to ordinary income taxation, at rates as high as 39.6 percent. Will this include the new type of 529 plan signed into law by President Obama just a month ago, the ABLE account?
If the Obama tax hike plan sweeps in ABLE accounts, they may never actually achieve liftoff. Conventional 529 plans would “dry up” and die off, according to Joe Hurley of the 529 portal website savingforcollege.com. “States that are not able to retain sufficient assets in their 529 plans will have a difficult time keeping their plans open,” Hurley added.
Since ABLE accounts are only a little over a month old, none have actually been established yet by 529 sponsors (i.e., states). If the tax treatment were to change, there would be no market for ABLE accounts and no incentive to invest resources in rolling them out for parents of disabled kids
Even if ABLE accounts are excluded from the rest of the president’s tax hike plans for 529s, it would still kill them off. Since ABLE accounts will only be offered in conjunction with the larger 529 accounts, the death of the latter necessarily means the stillbirth of the former. It’s like shooting the horse and expecting the cowboy to keep riding.